The lowdown on support for the self-employed

The Self-employed Income Support Scheme (SEISS) is now up and running to tide over young freelancers during lockdown – much earlier than expected. Iona digs into the scheme (which she has applied for), praises its delivery but examines the darker questions it poses about freelancing today

Any self-employed worker who filed a tax return in the 2018 – 2019 financial year and earned below £50,000 is entitled to a one-off grant from the government. This is worth 80% of their average monthly trading profits, up to a maximum of £2500. The scheme covers three months of earnings (providing up to £7500 in total).

HMRC initially warned that the system wouldn’t be in place until June, hence why I was telling freelancers to wait or apply for Universal Credit. Importantly, freelancers do have to actively apply for the scheme – contrary to previous expectations that HMRC would completely take care of it. But the process is very straightforward.

You should already have received an email from HMRC notifying you that you can apply through its online portal. You’ll need to supply your National Insurance number and your Self-Assessment Unique Taxpayer Reference (UTR) number to find out if you’re eligible.

If so, you just need to provide your Government Gateway user ID and password, bank account number and sort code. The system then calculates what you’re entitled to, tells you the magic number and lets you know when it will be paid (any time within six working days).

You can do this online in minutes. You do NOT need an ambulance-chasing firm to help you. If you are approached by anyone offering that service, ignore them as they will take an undeserving cut from YOUR money.

I am pleasantly surprised that HMRC has been so quick in delivering the scheme. This crisis has shone a light on the fragility of freelance finances, and how quickly they can deteriorate when our work vanishes. It’s good that the Treasury caught up with the reality of this lockdown for self-employed people, and have made this grant so easy to access.

I can testify to how quick and simple the process is, and the grant will be a lifesaver for millions of freelancers who still cannot ‘get back to work’ due to the severe lockdown restrictions still in place.

That’s the good news…here comes the bad!

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There are some major caveats that threaten to overshadow the initial success of SEISS. Its three-month shelf life looks optimistic at best, stingy and discriminative at worst, when you consider that social distancing could last for most of this year.

It could be the case that self-employed workers in many professions will not be able to work normally for some time to come. It can’t be right that support for them will be cut off just when their full-time peers will be weaned off the furlough scheme and back into work by their employers (if they’re not made redundant, that is).

Then there is the earnings cut-off of £50,000. Those who are new to freelancing and company directors also don’t qualify. In one way, this is understandable. It must be complex enough to administer these grants without trying to find a way to include those who aren’t fully in the self-assessment system, either because they are only entering it now or because they have limited their liabilities through a company structure.

But this doesn’t take away the sting of unfairness. After all, why exclude someone who only started freelancing last July? Why should someone earning £51,000 get nothing, and someone earning £49,000 get the maximum amount? Why should someone who was pressurised by clients to set up companies be left out in the cold?

The politics of freelance taxes

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Many excluded self-employed workers have a strong case to make for a rescue package, particularly those who happen to have jumped ship at the wrong time. The hope is that they followed conventional wisdom and built savings to bridge the inevitable gaps in their early freelance income. Otherwise, I would expect the Chancellor and HMRC to look back on the new freelance class of 2019 – 2020 with compassion and give them a retrospective boost.

Beyond that group, it is difficult to see where future help could be granted without it being over-generous or exploited. The cap on earnings had to fall somewhere, and £50,000 is more inclusive than the £30,000 ceiling that was being reportedly pondered by the Treasury.

The problem is that no two freelancers are the same. A blunt instrument like the SEISS was never going to accommodate all the permutations of freelancing and tax management now possible. The sheer diversity of modern self-employment mean there is a massive spectrum of freelancers who have all kinds of working, client and tax arrangements. And on that last point, I’m truly torn about whether those who pay themselves in dividends should get additional help from the taxpayer.

The Chancellor did recently confirm that company directors would be able to furlough themselves under the Job Retention Scheme. The downside is that directors wouldn’t be able to work (at least in their current job, within their current hours), while their freelance competitors benefiting from SEISS would.

There are also many directors who can’t submit a claim because they are paid annually and their salary submission to HMRC for 2019/20 tax year was made after  the 19th March. So anyone who pays themselves a salary at the end of the tax year is being left out.

One accountant who contacted me said:

“They are being discriminated against. These people have been employees on their company’s payroll for  many years but are now being excluded from the furlough scheme while also blocked from applying for SEISS.”

I cannot think of a good reason why these people are being left out of the system and I have asked HMRC for an explanation, which I hope to provide soon.

It is also certainly wrong that anyone who had no choice but to establish companies in order to work in sectors like TV and film should now be suffering. And many people quite rightly argue that setting up a limited company is an entirely legal strategy permitted by HMRC. Tax planning is not the same as tax avoidance or evasion: it is just a part of good financial management, a short hop and skip from tax-free products like ISAs.

However, unlike with Isas, you can’t really argue that setting up a limited company and paying yourself through dividends is straightforward, achievable without an accountant and viable for anyone who is less than a higher rate taxpayer. As someone who has considered this route myself in recent years (and doesn’t pay an accountant), I was amazed to discover the sheer amount of admin involved.

Okay, many self-employed folks get their accountant to take care of it. And I know many freelancers use accountants just to save time: their services aren’t just for the rich. But accountancy is often an unnecessary expense when (as I explained in an article for the Financial Times), filing a self-assessment tax return is not difficult. Accountants really add value when you start earning more and can save tax using schemes like limited companies.

I concluded that I would need to be earning much more to really make a limited company structure worthwhile. For those fortunate to be in that camp, the savings on NICs and tax are considerable, particularly if your spouse is named a shareholder. Sure, corporate tax needs to be paid and the way dividends are taxed has gone up in recent years too – but all the more reason to assume that those sticking by the strategy find it’s still washing its face.

I don’t even rule it for myself out for the future – no freelancer should be ashamed to be tax-smart when they already contribute so much to the economy. But in this already expensive crisis, if a line has to be drawn between the majority of freelancers who pay their taxes in a relatively straightforward, visible way and those who don’t, so be it.

Should we help excluded freelancers?

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It is not unreasonable to assume people who can establish a limited company structure have the wherewithal to save and invest too (even if they haven’t). It’s the same kind of assumption that lies behind the decision to exclude anyone with more than £16,000 in savings from Universal Credit.

Sure, there are directors that are not well-off, falling through the cracks because they were bounced into setting up a company. But it’s difficult to know if they comprise the majority or minority of the 710,000 limited company directors affected.

Perhaps we need to know. That way, we can judge whether it’s fair to provide additional help. But even then, it’s hard to see how this could be done fairly and transparently. The self-employment association IPSE has argued for a “pay now, claw back later” fund. This would see the Treasury granting emergency funds to company directors, similar to the 80% income guarantee awarded to PAYE and self-employed workers, who self-report their average dividend income. As the FT reported:

“If HMRC later found out that they had inflated the figures, they would be entitled to reclaim it with penalties attached.”

But such a scheme places an incredible amount of trust in people to be truthful, because with the best will in the world, HMRC will not have the resources to fully investigate as many as 710,000 claims retrospectively.

This crisis has, one again, laid bare how over-complex our tax system is, and perhaps all the discrepancies it has thrown up supports the argument for reform. After all, there is now (unfortunately) no guarantee that kind of economic coma couldn’t happen again. Perhaps knowing what we know now, it would be unconscionable to recommend setting up a limited company, or participating in other kinds of legal tax planning, that would disqualify you from government support in a crisis.

I am open to alternative suggestions – and arguments. I have enormous respect, compassion and goodwill towards all the self-employed community – and no-one should suffer financially as a result of a crisis that wasn’t their fault.

But as we try to meet the immense cost of shutting down the economy, the wider you cast the net for Britain’s diverse freelance workforce, the harder it is to justify paying all not to work. We have to assume some people will be better able to shoulder the burden of being off work if we want to avoid a crazy situation where nearly the entire workforce – including affluent company directors – are subsidised by tomorrow’s taxpayers (i.e. young people who are economically drowning) to remain in stasis for months.

Otherwise, there is only one ultimate solution. If people want to get back to work, we must let them. We must try to find a way to let people work, sell, buy and meet again as safely as possible. We know know this crisis could be with us for sometime. Indefinite hibernation is not an option.

Freelancers take informed risks all the time – and if we shield them and indeed millions of other full-time workers from them for much longer, we collectively take the risk of shrivelling our productive, innovative workforce permanently.

As time goes on, that is one risk I and many others will be less and less willing to take.

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